China One-Child Change Won’t Boost Growth

China’s decision to relax its one-child policy might spark a baby boomlet. But it is unlikely to alter demographic shifts that are under way and will drag on growth in years ahead.

A woman holds onto a safety string attached to the back of a child at a shopping mall in Beijing.

Reuters

The country for decades has enjoyed a “demographic dividend”—that is, a large share of working-age people compared to the total population.

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As nations develop, fewer infants die, boosting the population. Later, the birth rate falls, as education and income levels rise and people opt for smaller families. The dividends accrue in the period after this, when the baby boomers reach working age, but there are fewer children to support.

A larger workforce means more wage-earners, higher savings and greater investment. Countries like Japan, Singapore, Hong Kong, South Korea and China all grew strongly due to an expanding pool of labor.

David Bloom, a demographer at Harvard School of Public Health, coined the theory of the demographic dividend, estimates up to a third of the “miracle” growth in Asia between 1965 and 1990 was due to favorable demographics. In China’s case, the results were even sharper because of the decision to limit most families from 1980 to having only one child.

But, from 2016, China’s working-age population—those aged between 15 and 64—is set to start declining as a share of the population, according to the United Nations.

Globally, nations have faced declining working-age populations as their economies mature. In Asia, Singapore, Japan and South Korea have seen birth rates decline as people get richer. Efforts in these nations to incentivize people to have more children, including financial inducements, have failed.

Demographers note that for a country’s population to continue growing over the long run, its average fertility rate, or births a woman has over her lifetime, must be 2.1 or above. China’s fertility rate fell from 2.63 in 1980, when the one-child policy came in, to around 1.6 now. (There are already exceptions to the one-child rule, putting the number above 1.)

But it was already in free fall before the restrictions, declining rapidly from rates around 6 in the 1960s, suggesting there’s more at play than just rules. Chetan Ahya, an economist with Morgan Stanley in Hong Kong, argues changes in the one-child policy are unlikely to make a difference here. “The fertility rate anyway drops,” he said. “The effect will be weak because a lot of the population have crossed a certain income level.”

Barclays Bank, in a report Friday, agreed the impact on fertility rates is likely to be small. The bank notes that fertility rates are even lower in urban areas, where space is limited. According to China’s 2010 census, the fertility rate was 0.74 in Shanghai and 0.71 in Beijing. “China…shares the global phenomenon that couples in large cities tend to have fewer children,” Barclays said.

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There may be some countervailing benefits to the economy from the changes, such as a boost in consumption as parents spend more on the new babies. Barclays estimates there could be 1.3 million extra births per year, an increase of 8% on current annual births of around 16 million.

That might lead to more demand for diapers, tissues and baby-milk formula. But Barclays already estimates the market for these products will grow up to 10 times over the next 15 years as people get more disposable income. Against this, the demographic effect seems limited.

And from an economist’s point of view, this extra consumption does nothing to help China’s potential growth. The economy grew by an average 9.6% between 1998 and 2013, according to the International Monetary Fund. That’s likely to slow to 7% in 2018, the fund estimates, from 7.8% in the third quarter. This slowdown in potential growth is in large part due to demographics.

So, what can China do?

As the working-age population falls, nations have to find other ways to keep growth ticking over, including increasing productivity and allowing immigration. That’s what happened in the U.S. and Europe as their economies developed. Barclays says a scarcity of labor is likely to push factory owners to move up the value chain, away from low-end manufacturing. The bank also believes a transfer of people from rural areas to the city can help supply more labor to factories.

Still, others point to the fact half of China’s 1.3 billion people already live in cities, reducing future benefits from urbanization. Mr. Ahya at Morgan Stanley believes from now on urbanization will slow, meaning the demographic challenge is here to stay.

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